Aug. 25 (Bloomberg) -- Chinese stocks, on pace for their
best quarterly gain in a year, are still in the “early” stages
of a rally, according to Marketfield Asset Management LLC’s
Michael Shaoul.

Marketfield, which manages $18.5 billion, is bullish on
Chinese equities amid optimism the government will take more
steps to boost Asia’s biggest economy, Shaoul said. President Xi
Jinping is trying to avoid a slowdown in output as he seeks to
increase the contribution from services to growth, while
reducing reliance on the credit-driven construction that has
propelled expansion in the past.

“We would expect to see the government and the central
bank bring in stimulus measures favoring state-owned
enterprises, which is quite bullish,” Shaoul said by phone from
New York on Aug. 20. “What they don’t seem to want to do is to
re-stimulate real estate itself. You might even start to see
retail money redirected to equities after years of chasing real
estate.”

Stock gains have contrasted with housing prices, which last
month fell the most since January 2011. UBS AG estimates that
real estate accounts for more than a quarter of final demand in
the economy. The slump, combined with a credit slowdown, adds to
risks the nation will miss its 7.5 percent growth target this
year.

‘Clean Breakout’

The Shanghai A-Share Stock Price Index, which has risen 9.4
percent this quarter to 2,345.83, will show a “clean long-term
breakout” if it passes 2,500, while the Hang Seng Index has
room for further gains after reaching a six-year high last week,
he said. The Bloomberg China-US Equity Index of the most-actively traded Chinese stocks in the U.S. advanced 0.5 percent
to 116.15 last week and is up 9.6 percent since the end of June.

Shaoul’s $18.5 billion Mainstay Marketfield Fund has gained
78 percent on a total return basis since it was established in
July 2007, compared with a 60 percent increase in the Standard &
Poor’s 500 index, data compiled by Bloomberg show. The fund can
bet on both rising and falling shares.

The money manager, who had been bearish on China since at
least 2010, said his outlook changed in the second quarter after
a four-year selloff pushed the Shanghai A-share gauge down 36
percent. The shift was part of a broader move back toward
emerging markets that started with Brazil in March on prospects
for improved demand for commodities, he said. He declined to
name specific stocks Marketfield has been buying.

No Sellers

“As the economic news deteriorated this year it was
notable that the equity market did not follow suit,” he said.
“The rhetoric people used became more negative, but it appears
that this came from people who had already sold their holdings.
Bear markets generally finish because you run out of sellers.”

China’s new-home prices fell in July in almost all cities
that the government tracks as tight mortgage lending deterred
buyers even as local governments eased property curbs. The value
of homes sold declined 28 percent last month, the biggest drop
this year.

Aggregate financing was 273.1 billion yuan ($44.4 billion)
in July, the least since the global financial crisis, data from
the central bank showed on Aug. 13. The plunge in credit and
slowdown in investment spending last month prompted speculation
the government will act to revive growth, which picked up in the
three months through June after decelerating in the prior two
quarters.

Market Risk

While Shaoul sees further gains, Bank of America Corp.’s
David Cui, the No. 1 ranked China strategist by Institutional
Investor magazine, said July 14 that the stimulus sparking the
rally makes stocks less appealing as leverage rises and free
cash flow dwindles.

The Shanghai A-share index’s relative strength index was
67.2 on Aug. 22. It peaked at a five-year high of 81.7 on July
31. An RSI above 70 is a signal to some analysts that a security
is poised to fall.

The nation’s sliding interest rates may suggest the
People’s Bank of China is willing to move to encourage
borrowing, according to Shaoul. The Shanghai Interbank Offered
Rate for overnight lending which measures liquidity between
banks, fell to a two-month low of 2.83 percent last week amid a
three-week decline.

A Bloomberg index gauging the availability and cost of
credit in Asian countries excluding Japan rose above zero this
week for the first time since June 2013, when global interest
rates surged on concern the Federal Reserve would taper monetary
stimulus. A positive value indicates accommodative financial
conditions, while a negative value indicates tighter credit.

“This is obviously an important development for emerging
markets in particular, given that this metric is tied to swap
spreads and equity valuations in China, Korea, India and
Singapore,” Shaoul said in a note Aug. 19.